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ALTERNATIVE FUELS Energy analysts are lukewarm on ethanol’s prospects

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While many ethanol plants have sprouted up on the plains of the Midwest, energy analysts are torn as to whether the market has plateaued.

Ernie P. Goss, economics department chair at Creighton University, Omaha, Neb., said he sees the market for ethanol—and the related steel products to refine and store the fuel—growing. "There are a lot of new plants under construction and we have a Congress and a President who are behind it," he said. "If anything, we'll get more that way. I can't imagine it not moving in that direction."

Oil prices have been going up and long-term projections are for oil prices to remain high, Goss said. "Oil above $80 a barrel does not bode well for gasoline derived from oil."

And statistics point to more price increases coming down the pipeline.

Ethanol production capacity stands at 6.09 billion gallons, with 6.43 billion more gallons expected over the next two years, according to the Renewable Fuels Association. Because of the growth in domestic ethanol production capacity, the federal Energy Information Administration expects that late this year ethanol usage will surpass the 7.5-billion-gallon-a-year level mandated for achievement by 2012 by the renewable fuels provisions in the Energy Policy Act of 2005.

The only drawback is the potential for ethanol plants to lose money in the current environment, which includes tentative consumer acceptance, limited product transportation and an increase in the price of the raw material—corn.

"There are reports that some investors are disappointed in what's going on with the profitability of the plants, but in the long run we're talking about oil prices that are rising," Goss said. "I have to believe in the short- to intermediate-term it looks very good."

Six Midwestern states—Illinois, Iowa, Minnesota, Nebraska, South Dakota and Wisconsin—account for more than 80 percent of U.S. ethanol production, making it challenging to distribute the product elsewhere. Corn sold for $2.10 to $2.20 a bushel a couple of years ago, Goss said, but is about a dollar higher now, which could spur further research to develop other raw materials, like switchgrass.

Vincent Pappalardo, managing director of Dresner Partners Investment Banking, Chicago, believes biofuels made from used restaurant cooking oil could be an alternative. "It's an incredible concept," he said. "They can't throw the grease down the trap anyway, so it can be recycled this way. If it really does take off, you'll be able to go to McDonald's to refuel."

Biofuel from used restaurant oils takes much less refinement than corn-based ethanol, Pappalardo said. "On the corn side, a million people are out there chasing projects. A lot of projects got caught up in the credit crunch, and some are not funded because they don't make sense economically. The technology requires more energy than it produces. My concern based on the research I've read is we can't grow enough corn to make a dent."

Michael C. Lynch, president of Strategic Energy & Economic Research Inc., Amherst, Mass., is equally bearish. "The market is getting close to a peak," he said.

Much of the expansion in ethanol plants was to replace methyl tertiary butyl ether, which is added to gasoline in summer in areas of the country with high pollution. "To increase ethanol demand further, it has to compete with gasoline," Lynch said. "That's a lot harder."

The 5.4 billion gallons of ethanol consumed in 2006 represents just 3.8 percent of the 141 billion gallons of gasoline consumed last year, according to the American Petroleum Institute, Washington.

"I doubt we'll see enough government subsidies to make ethanol attractive as a fuel in the long term," Lynch predicted. "Although gas prices have moderated and may go up, longer term it will stay low enough that ethanol will be more expensive than gas."

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